Legal Malpractice Insurance: Claims-Made Coverage, Part 5 of 5: How It Affects Your Premium

Your firm’s malpractice premium de-pends on its attorney count, areas-of-practice (AOPs), claims history, geo-graphic location, etc., your chosen policy limit and deductible, your insur-er’s claims experience with the other law firms it insures and its lines of coverage it underwrites, its overhead, investment returns, etc.

Yet, independent of all of these, legal malpractice premiums reflect the fact that they’re underwritten on a claims-made basis, as discussed in our prior posts, rather than on an occurrence basis, as most lines of property-casualty insurance are.

The exposure under a new claims-made policy increases sharply each year, i.e., con-sider Lawyer Bill, who purchased a malpractice policy when he began practicing in 2000, and has had continuous coverage since then.

The risk that Bill will be sued for malpractice in his first year of practice is low, since he likely has few clients, and he would have to make a mistake, which would then have to be discovered, and cause damage, and result in a suit all within that year. 

However, in each subsequent year, Bill will likely have more clients and harder cases; he thus has more opportunity to make mistakes that injure his clients, and that they discover and sue him for.

Together, these factors increase his risk of being sued for malpractice each year. Insur-ers call this “increasing prior acts exposure”, with “prior acts” meaning those committed in previous policy years. For example, if Lawyer Bill started his practice on 1/1/2000, and bought a legal malpractice policy effective January 1, 2000 – December 31, 2001, he’ll have no prior acts exposure; if he renews it on January 1, 2001, then he – and his in-surer – will have one year of prior acts exposure: January 1, 2000 – December 31, 2000. Further, each year he renews the policy will add another year of prior acts exposure.

To accurately price this increasing exposure, insurers charge a lower premium in the first year of coverage, and apply “step-rate” factors in calculating the renewal premium each year, which result in higher premiums, independent of all other factors, i.e., changes in the firm’s attorney account, practice areas, etc., the insurer’s investment returns, etc.

Step-rate increases cease when the policy is deemed to have reached maturity, which for most attorneys is after five years of coverage, during which they cause a firm’s premium to approximately double.

After that, whether the firm’s attorneys have five years or 50 years of prior acts cover-age, it doesn’t affect the premium, because although their adding new clients, and thus new risks each year, their risk of being sued by former clients decreases as the statute of limitations from early cases tolls. Thus, the overall risk of a malpractice suit remains constant.